You drag it to your diplomacy mods folder....
assuming you have at least sins 1.191/entrenchment 1.051/diplomacy 1.01, the Mods NEED to be placed here for xp
C:\Documents and Settings\'user name'\Local Settings\Application Data\Ironclad Games\Sins of a Solar Empire\Mods-v1.191
C:\Documents and Settings\'user name'\Local Settings\Application Data\Ironclad Games\Sins of a Solar Empire\Mods-Entrenchment v1.051
C:\Documents and Settings\'user name'\Local Settings\Application Data\Ironclad Games\Sins of a Solar Empire\Mods-Diplomacy v1.011
or here for vista/windows 7
C:\Users\'user name'\AppData\Local\Ironclad Games\Sins of a Solar Empire\Mods-v1.191
C:\Users\'user name'\AppData\Local\Ironclad Games\Sins of a Solar Empire\Mods-Entrenchment v1.051
C:\Users\'user name'\AppData\Local\Ironclad Games\Sins of a Solar Empire\Mods-Diplomacy v1.011
NOTE the first two folders after the 'user name' are hidden , so to see them you must first click on 'tools' then 'folder options', then 'view', then click on 'show hidden files& folders' then click ok, then you will be able to browse your want to the folder. I suggest when you find the folder that you create a shortcut to it on the desktop
NOTE 2 the 'user name' in the above paths is your WINDOWS login user name, eg Administrator
note 3 the c:\ actually refers to the drive letter that windows is installed on (usually C:, but I have seen it as high as L:)
and for trinity it is the same paths